As the European debt crisis has intensified in recent weeks and
months, many investors have sought to exit the common currency bloc
for other European nations that do not use the euro. Generally
speaking, this has resulted in many investors looking to nations
such as the UK, Switzerland, and a few Scandinavian nations as
well.
Beyond these choices, however, a few intrepid investors have
chosen to look east to the large market of Russia instead. The
country has some appeal due to its relatively small public debt,
strong trade balance, and little banking exposure to the European
disaster (see
How To Play The Spain ETF
).
In fact, this is likely a key reason for why the country may
have seen some interest from European focused investors as of late.
After all, many of the Scandinavian, British, and Swiss firms that
dominate their respective national ETFs have much higher levels of
euro zone banking exposure than their Russia ETF counterparts.
Furthermore, many of Russia's key export partners are either
strong euro zone countries-such as the Netherlands and Germany-or
nations outside the euro zone such as Turkey, China, and the
Ukraine. This suggests that an austerity slowdown isn't likely to
impact Russian businesses as much as many of its European
counterparts, suggesting that it could be a better play in the
region.
However, despite all these positives for the Russian economy,
the country's markets have sunk as much or even more than many of
the PIIGS markets over the past few weeks and months.
Unfortunately, the strong points of the Russian economy appear to
be no match for the weakness in one key aspect of the global
economic picture; oil (read
Play An Oil Bull With These Three Emerging Market
ETFs
).
Russia is
practically tied with Saudi Arabia
in terms of oil production and is also the second biggest exporter
of the product as well. Given this, and the heavily concentrated
nature of the Russian economy, the key commodity tends to be the
main driver of the fortunes in the nation.
While this can be a great thing when oil markets are surging
higher, it can also have the opposite effect when crude prices are
tumbling. In fact, over the past six months, the main Russia ETF
has slumped along with crude oil and has easily underperformed
broad European markets as well.
Besides a recent surge thanks to stimulus hopes, the top
Russia ETF,
RSX
, has lost about as much as
USO
a popular oil benchmark has in the same time frame, with both
tumbling by more than 11%. Meanwhile, broad European markets, as
represented by
VGK
, have fallen by about a third as much as their Russian
counterparts over the past six months, suggesting that while
there are a few exceptions to the rule, a broad play on Europe
still would have been a better idea than investing in Russia over
the past six months and especially in the past six weeks.
This has also been particularly the case for the Russian small
cap market, as represented by the
Market Vectors Russia Small Cap ETF (
RSXJ
)
. Over the past six months, this fund has lost over 16%, putting it
close to the losses that some of the highly indebted PIIGS members
have suffered in the same time frame (see
Is Now The Time To Buy Russia ETFs?
).
Yet, with this being said, investors should note that some of
the less popular Russia ETFs-such as
RBL
and
ERUS
-managed to lose a bit less in the time period, respectively, 9.1%
and 7.1%. Part of this is likely due to the focus of these products
on oil and gas integrated firms while RSX has a greater tilt
towards materials and riskier oil exploration firms, while RSXJ
feels the full brunt of political risk and is already volatile due
to its small cap nature (see
Time To Consider The Small Cap Oil ETF
).
Russia Is Not A Safe Place To Be
No matter how investors have played Russia ETFs over the past
few months, the results have been a nightmare. Clearly, the country
has not offered up much of a safe haven when compared to its
Western counterparts, despite its relative lack of exposure to the
epicenter of the crisis.
Instead, it appears as though the broad weakness in oil markets
has driven the Russian market lower, exposing just how dependent on
high oil prices the Russian economy still is. Undoubtedly, the
Russian market is one that should only be played in an oil bull
scenario, as this is still the chief driver of the country despite
attempts at diversification (see more on ETFs at the
Zacks
ETF Center
).
All of the ETFs tracking the country reflect this to a varying
degree and need to be approached with caution when oil prices are
either flat, or especially when they are sliding. While Russia may
be an interesting pick for those seeking exposure beyond the euro
zone, recent events show that it doesn't offer much of a safe haven
and instead has been pretty much the opposite over the past three
month period.
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ISHARS-MS RUSSA (ERUS): ETF Research Reports
SPDR-SP RUSSIA (RBL): ETF Research Reports
MKT VEC-RUSSIA (RSX): ETF Research Reports
MKT-VEC RUS SC (RSXJ): ETF Research Reports
US-OIL FUND LP (USO): ETF Research Reports
VIPERS-M EUROPN (VGK): ETF Research Reports
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